The fact that one currency will be more attractive than another on the foreign exchange market is due to several factors that include of course trend forecasts as well as a particular currency’s interest rate.
It is therefore important to know how the interest rates for the Sterling Pound and the American Dollar are fixed before launching into trading the GBP/USD currency pair.
General presentation of the GBP/USD currency pair:
The GBP/USD currency pair represents the Forex exchange rate between the Sterling Pound and the American Dollar. To summarise, this pair represents the exchange rate of a British Pound in American Dollars. This pair is often called the Cable or the Sterling.
The GBP/USD currency pair rate is quoted, as with other currency pairs, in pips or tenths of pips by certain brokers. Historically we note that over the last 20 years or so the Cable has moved in a channel of between 1.40 and 2.10 pips. Its highest result was attained in 2007 but the pair rapidly lost value due to the economic crisis that began in 2008. It was therefore during this period and because of the financial crisis that the pair reached an all time low of 1.40 pips.
Many traders use the Cable to trade on the Forex as the indicators that enable you to predict its movements are numerous due to the popularity of the American Dollar and the singularity of the British Pound.
The particularities and characteristics of the GBP/USD currency pair:
It is not for nothing that the GBP/USD currency pair is one of the most popular with traders on the Forex market. The two economies that are concerned here, the United Kingdom and the United States, are among the strongest and oldest modern economies of the world with their currencies, the American Dollar and the Sterling Pound, considered as safe currencies due to their size and position on the international economical level.
Another interesting characteristic related to the GBPP/USD currency pair concerns the fact that the City and therefore London is even now still considered as a central Forex trading place worldwide. In fact, estimates relating to trading figures are highly impressive with nearly 35% of Forex trades completed in London. This market offers the advantage of covering the trading period preceding that of America and is therefore one of the most liquid trading periods of the day.
This trading period for the GBP/USD currency pair can be highly beneficial due to this volatility with movements that are often significant as the major players in London and its periphery enter the market as the United Kingdom starts its work day. This is what we call the London session during which these particular characteristics can have an impact on the way in which traders view this particular currency pair, the GBP/USD.
Some technical data
Contrary to what many novices may think, the GBP/USD is one of the most traded currency pairs on the Forex market and is responsible for nearly 400 billion dollars in trades each year. This volume represents no less than 12 to 13% of foreign exchange trades on an international level on the Forex market. It is recommended to only invest small or medium sized amounts in this pair due to the significant differences noted between the buying and selling rates.
In the past the Cable was considered as one of the most volatile currency pairs with significant rises and falls occurring in only a few hours.
What trading strategies should be adopted to invest effectively in the GBP/USD exchange rate:
Let us now pass on to the strategic aspect of online investment in the GBP/USD exchange rate. Initially, it is primordial to decide when you wish to trade in this asset as depending on the investment period chosen the atmosphere and therefore the opportunities and environment can vary tremendously.
Depending on the strategy that you wish to implement you can choose one or other of these periods. We particularly know that the Asian sessions, like that of Sydney and Tokyo, are ideal for strategies in range with more limited movements concerning time than the movements we can observe during the London or American sessions that offer more activity. The range strategy generally consists of taking buying positions when the costs are low and achieve the technical support level and take selling positions when the rate is higher or achieves the technical resistance level. This strategy is relatively easy to implement as it doesn’t really require an in-depth knowledge of the Forex market and the technical indicators such as the support and resistance levels can be displayed in real time on the stock market charts.
Of course, you could also choose another strategy if you wish to invest in the GBP/USD currency pair during the most active periods, this means when the United States and Europe ensure liquidity particularly with break strategies. These breaks consist of following the technical support and resistance levels to detect the signs of a trend reversal as these reversals, also called ‘breaks’ are more frequent during these periods than those of the Asian sessions. Now let us examine these break strategies in more detail.
There are in fact different methods of implementing this type of strategy using the GBP/USD currency pair. We start systematically by researching and analysing the highest risk/profit ratios with, for example, a 20 pip risk and an objective of 100 pips in the case of success. This therefore corresponds to a risk/profit ratio of 1 to 5. In fact, when the risk/profit ratio is high and therefore more favourable for trading simply obtaining two profitable positions out of five will generate an overall profit from this currency pair. Of course a comprehensive analysis of this currency pair will further increase these statistics with significant profits.
To calculate the risk level of a trend and therefore taking a position on the GBP/USD currency pair you will need to identify the highest preceding upswings for selling positions and the lowest preceding downswings for buying positions. This risk/profit ratio calculation can then be used to identify the zones where you should place your stop orders as part of your break strategy. Other technical indicators that can be displayed on your historical charts can be used in order to detect the high and low breaks that can be seen on these long term or historical charts.
To summarise and concerning this investment strategy using the breaks that is clearly the most attractive for the GBP/USD pair, and whatever the way in which the support and resistance levels are identified, you should above all reflect on implementing this strategy during the most active times of the day and look for the rates that respect these levels during the calmer periods to obtain more stable results.
The GBP/USD currency pair is still an incomparable currency pair on the Forex that also enables other investment strategies. Here we will simply explain the range and break strategies that seem most appropriate to this pair and are particularly effective depending on the time of day when you decide to take position but there is nothing to stop you from choosing your own approach to this currency pair. You could for example use the fundamental analysis to refine your strategy by taking position at the time of significant announcements and events that could influence these two currencies and as we explained earlier without neglecting the technical aspect with a systematic chart analysis of this currency pair before taking position if you wish to limit your risk of losses.